Title: Plan for Your Retirement
1Plan for Your Retirement
2The Big Picture!Steps to Financial Freedom
- 1 - Manage Spending
- -Dollar Decisions
- -Couples and Money
- 2 - Prevent Emergencies
- -Dollar Decisions
- -Making Insurance Work
- -Guarding Against ID Theft
- -Couples and Money
- -3 - Become Debt Free
- -Credit Cents
- -Buying Bargains
- -Couples and Money
- 4 - Prepare for Retirement
- -Investing for Retirement
- -Legally Secure your Financial Future
- -Long Term Care Workshop
- 5 - Teach Kids about Money
- -4H projects (for kids)
- -Welcome to the Real World
- -Children and Money (for adults)
- -NEFE High School program
- 6 Pay Your Off Your Home
- -Home of My Own
- 7 - Live Free of Financial Worry!
- -Non-Retirement Investing
- -Long Term Care Workshop
- -Legally Secure your financial future
- -Estate planning
- -Charitable Giving
-
3Replacement Ratios Annual Income
Married couples to maintain standard of living
Booke Co. Consultant/Actuaries 1987
4The Difference BetweenSavings and Investing
- Savings
- Money held in a short-term cash assets
- Money used for emergencies and specific
purchases - Investing
- Money used to increase net worth
- and achieve long-term financial goals
5Basic Building Blocks of Successful Financial
Management
6Two Types of Investments
- Ownership
- Investors own all or part of an asset
- Examples include
- stock
- real estate
- growth mutual funds
- collectibles
- Loanership
- Investors loan money to companies, government, or
financial institutions - Examples include
- bonds
- money market funds
- CDs
7Annual Net Worth
- At least once each year, determine your net worth
- After January 1 (distributions of capital gains
and dividends) - Include
- Investments (Emergency fund, Retirement,
After-tax savings) - Home equity
- Insurance cash value
- Personal property (optional)
8Defined Benefit Plan
- Defined by the level of benefits received by an
employee who has retired - Often referred to as pension
- Benefits are determined by formula linked to
years of employment and workers income
9Defined Benefit Plans
- Favor long-standing employees
- Poorly suited to early leavers
- Highest paid benefit most
- Those whose earnings peak late benefit most
- Poor value for those whose earnings plateau early
in career - Extraordinary market earnings accrue to benefit
of employer - Often include Cost of Living Adjustments (COLAs)
10Defined Contribution Plans
- Worker not the employer bears risk of
investment losses and successes of profits - Balance in plan depends on contributions plus
investment income minus expenses and losses
11Defined Contribution Plans
- Put the burden of management on employee
- During accumulation phase
- During withdrawal phase (VERY IMPORTANT!)
12Defined Benefit Plan
- Example 60,000 final salary, 60 benefit
payments for life of employee 36,000/year - Like having a fixed income investment of 450,000
13The Economist, 2/16, 2002
14The Economist, 2/16, 2002
15The Economist, 2/16, 2002
16Know Your Investment Options
- Retirement
- College savings
- After-tax investments
17Tax Deferred Investments
- 401(k)
- 403(b)
- 457
- Traditional IRAs
- SEPs (Simplified Employee Pensions)
- Keoughs
- Annuities
18Annuities
- Generally have fees up to 3,
- One strategy is to invest half of your lump sum
(250,000) in an annuity to receive the higher
payout and the other half (250,000) in a Mutual
Fund. Live off the Annuity payments and the
interest from the Mutual Fund for a total of
(25,000) income a year with the principle of the
mutual fund never decreasing.
19Tax Deferred Investments (Traditional IRAs,
401(k), 403(b), 457, SEP, Keough
- Designated funds are not taxed the year they are
earned and invested, thus lowering taxable income - Earnings grow tax deferred until withdrawn
- Contributions and earnings are taxed when
withdrawn
20Tax Deferred vs. After-Tax Investments(Assume
1,000 invested 28 Tax Bracket)
- Tax Deferred 1,000 invested, no earnings taxed
until withdrawal (post 59 and ½) - After-Tax 720 invested after paying taxes
earnings taxed annually (dividends or capital
gains)
may differ if invested in individual securities
or mutual funds
21 Taxable Returns (at 28) Tax-Deferred Returns
German/Forgue, PERSONAL FINANCE, Fifth Edition,
Tax-Sheltered Returns are Greater than Taxable
Returns (Illustration 8 Annual Return and
2000 Annual Contribution)
22Tax Free Investments
- Roth IRA
- Municipal bonds (mostly for those without other
tax free investment options
May be penalties if earnings are withdrawn early
23Tax Free Investments(Roth IRA)
- You pay taxes the year you earn the money and put
the funds into these investments - Contributions and all future earnings are tax
free when withdrawn after age 59 and a half - Roth IRAs are designed for your retirement
24Tax Free vs Tax Deferred vs After-Tax
Investments(Assume 1,000 and 15 Tax Bracket)
- Tax Deferred 1,000 invested no earnings taxed
until withdrawal (post 59 and ½) - Tax Free (e.g. Roth IRA) 850 invested after
paying taxes all earnings grow tax free - After-Tax 850 invested after paying taxes
earnings taxed annually
may differ if invested in individual securities
or mutual funds
25Raising the Stakes Retirement Account Limits
Source Mutual Funds 12/2001, p. 107
26Should I Save for Retirement or College Expenses?
27The Big Picture!Steps to Financial Freedom
- 1 - Manage Spending
- -Dollar Decisions
- -Couples and Money
- 2 - Prepare for Emergencies
- -Dollar Decisions
- -Making Insurance Work
- -Guarding Against ID Theft
- -Couples and Money
- -3 - Become Debt Free
- -Credit Cents
- -Buying Bargains
- -Couples and Money
- 4 - Prepare for Retirement
- -Investing for Retirement
- -Legally Secure your Financial Future
- -Long Term Care Workshop
- 5 - Teach Kids about Money
- -4H projects (for kids)
- -Welcome to the Real World
- -Children and Money (for adults)
- -NEFE High School program
- 6 Pay Your Off Your Home
- -Home of My Own
- 7 - Live Free of Financial Worry!
- -Non-Retirement Investing
- -Long Term Care Workshop
- -Legally Secure your financial future
- -Estate planning
- -Charitable Giving
-
28Should I Save for Retirement or College Expenses?
- You cant borrow money to retire
- They dont give retirement scholarships
- Kids will be better off, if THEY dont have to
worry about your care in old age. - Save first for RETIREMENT!
29Risk Pyramid
30Investment Risks
- Loss of capital (market risk)
- Loss of purchasing power (inflation risk)
- Interest rate risk
- Credit quality risk
- Prepayment risk for callable assets
- Liquidity risk
- Political risk
- Currency risk
31TIAA-CREF Investing Today Financial Series 3
32Standard Deviation 11.46 Mean 10.00
William Bernstein, The Intelligent Asset Allocator
33Standard Deviation Market Risk
- 2 3 Money market (cash)
- 3 5 Short-term bond
- 6 8 Long-term bond
- 10 14 Domestic stocks (conservative)
- 15 25 Domestic stocks (aggressive)
- 15 25 Foreign stocks
- 25 35 Emerging markets stocks
34William Bernstein, The Intelligent Asset Allocator
35TIAA-CREF Investing Today Financial Series 3
36William Bernstein, The Intelligent Asset Allocator
37William Bernstein, The Intelligent Asset Allocator
38Time Value of Money
- Investor A
- Starts investing at age 25
- Invests 2,000 for 10 years and stops
- Total invested - 20,000
- Investor B
- Postpones investing until age 35
- Invests 2,000 for the next 31 years
- Total Invested - 62,000
39Time Value of Money at 11 Interest
- Source Ibbotson Associates, 1998
40TIAA-CREF Investing Today Financial Series 3
41Monthly savings required to accumulate 350,000
at 8 rate of return if starting at indicated age
TIAA-CREF Investing Today Financial Series 3
42Dollar-Cost-Averaging
- Month Amount Invested Share Price Shares
Purchased Cumulative Value - January 150 30 5 150.00
- February 150 30 5
300.00 - March 150 25 6 400.00
- April 150 25 6
550.00 - May 150 20 7.5 590.00
- June 150 15 10
592.50 - July 150 15 10
742.50 - August 150 15 10
892.50 - September 150 20 7.5
1,340.00 - October 150 25 6
1,825.00 - November 150 30 5
2,340.00 - December 150 30 5 2,490.00
- TOTAL 1,800 280
83 2,490.00 - Average price per share with Dollar Cost
Averaging 21.69 - Average price per share without Dollar Cost
Averaging 23.33
43How much do I need for retirement?
- Several studies have determined that to ensure
that your portfolio outlived you, you should not
withdraw more than 4 per year. - For example, if you need 40,000 above Social
Security income, you would need 1 million in
your portfolio to make sure that you did not
outlive your portfolio - 40,000 x .04 x 1 million
44Retirement Needs
- Withdrawal rate studies generally show that the
safest investments would include both stocks and
bonds and should include as much as 75 stocks. - Those studies show that if you are willing to
lower your expectations of outliving your
portfolio to about 20, you could withdraw at a
rate of 6 7. - In most cases, you will have a high likelihood of
dying with a portfolio significantly higher than
when you entered retirement _at_ 4 withdrawal rate.
45Shop for funds
- Shop for funds using Morningstars 5-star rating
system.
46- To achieve satisfactory investment results is
easier than most people realize to achieve
superior results is harder than it looks. - Benjamin Graham, The Intelligent Investor